Excerpt:.....taken by taking recourse to a deeming provision so as to deprive the plaintiffs of their right of action which they were entitled to avail of before the order for compulsory winding up was actually passed. 19. first case to which i would like to refer is one reported in (1867) 2 ch a 604 known as smith's case. lord cairns observed at page 617: i therefore think that the fact that tbe interest of creditors is involved in the winding up does not alter the matter under the circumstances of the case like the present, and that tbe question must be disposed of as if it were to be disposed of upon the bill at the time when tbe bill was filed and before any winding up in which case the. 25. next case which i would like to make a reference is the decision of shadilal j. the cases relied upon by..........up order is made on such a petition. in the present case, according to the learned counsel, the suit in question was filed after the presentation of the petition for winding up of the company by the court.the petitioners' claim for rescission and rectification of the register had come to an end, they not having claimed the same for over six years and particularly till after the petition for winding up had been submitted. in effect, it is urged, that the suit was commenced after the commencement of the winding up and the petitioners cannot obtain leave on the ground that he had commenced his action prior to winding up.it was further contended that section 100 of the indian companies act, 1913, lays down that the promoters and the directors of the company will be held liable for any.....

Judgment:ORDER

V.R. Nevaskar, J.

1. This is a petition under Section 171 of the Indore Companies Act, which is similar to the Indian Companies Act, 1913, for leave to continue the suit filed by the petitioners, the Joint Hindu Family Firm, Chunnilal Onkarmal and Chunnilal Onkarmal Ltd., against the State of Madhya Bharat, His Highness the Maharaja Sir Vikramsingh Rao of Kolahpur and the Vikram Sugar Mills Ltd., being the Company under liquidation

2. The petition is opposed by the Liquidators as also by two of the creditors and debenture holders of the Company namely Govindram Saxsaria Trust and R. B. Seth Hira Lalji.

3. In order to consider the question whether the leave sought for, should be granted or refused it is necessary to take into account a lew preliminary facts having a bearing on the question under consideration. It is also necessary to take into account the nature of the suit in respect of which the leave is sought.

4. On 23-1-1950 Mr. P. P. Pandit, a creditor of Shri Vikram Sugar Mills Ltd., submitted a petition under Section 162 of the Indore Companies Act for compulsory winding up of the Company. In this petition an order for winding up was passed on 2-4-1951 and liquidators were appointed. After the commencement of the liquidation proceedings hut prior to the winding up order the petitioners filed their suit on 31-8-1950. By this suit the petitioners sought to recover from the State of Madhya Bharat as the successor-in-interest of erstwhile Princely State of Dewas and the Maharaja Vikramsinghrao Rs. 5,00,000/- together with interest thereon at 6 per cent, per annum from 21-3-1955 upto the date of the suit as compensation for the alleged acts of fraud and misrepresentation on the part of the Maharaja as representing the State of Dcwas and 'individually' at the time of the promotion of the Company which induced them to apply for and obtain allotment of one lac shares of the face value of Rs. 10,00,000/-half the number out of which worth Rs. 5,00,000/-has been cancelled by the resolution of the Board of Directors dated 21-6-1946. They further sought a declaration of their right to be indemnified to the extent of Rs. 5,00,000/- in case they are made to pay that much sum to the Company in respect of the shares allotted to them.

5. They further sought rectification of the Company's Register by striking off their names in which the aforesaid shares worth Rs. 10,00,000/- stood and substitution of the names of the State of Madhya Bharat and the Maharaja Vikramsingh Rao in their place.

6. The grounds on which the leave is sought are:

1. That the Company is a necessary party to the suit aforesaid.

2. That the suit is the most convenient method of trying the matter in controversy in that suit.

3. That the petitioners, being share-holders o the Company have commenced their suit for rescission and rectification of the Register before the winding up.

7. Mr. Chaphekar for the petitioners contended that they have sought the relief of rescission and rectification of the Register of the Company by removal of their names from one lac shares standing in their names, besides claiming compensation in respect of acts of the Maharaja Vikramsingh Rao whereby they were induced to apply for and obtain allotment of the shares of the Company of the face value of rupees ten lacs. For such a suit the Company is a necessary party. Moreover he urged that the proceedings for relief of rescission and rectification commenced prior to winding up.

He relied upon the decision of House of Lords in Henderson v. Lacon, (1867) 5 Eq 249 and also upon the decision in Hall v. Old Talargoch Lead Mining Company, (1876) 3 Ch D 749, in support of his contention. Reference was also made to the decision in the matter of Subhodhaya Publication Ltd., (S) AIR 1955 Mad 449 and Sen and Sarkar's Company Law page 463 ('1937 Edition).

8. On the other hand Mr. Dhanda for R. B. Seth Hiralal contended that this is not a fit case in which the leave sought for ought to be granted. According to S, 168 of the Indian Companies Act, 1913, winding up of a Company by the Court has to be taken to commence on the date of the presentation of the petition for the winding up when a winding up order is made on such a petition. In the present case, according to the learned counsel, the suit in question was filed after the presentation of the petition for winding up of the Company by the Court.

The petitioners' claim for rescission and rectification of the Register had come to an end, they not having claimed the same for over six years and particularly till after the petition for winding up had been submitted. In effect, it is urged, that the suit was commenced after the commencement of the winding up and the petitioners cannot obtain leave on the ground that he had commenced his action prior to winding up.

It was further contended that Section 100 of the Indian Companies Act, 1913, lays down that the promoters and the directors of the Company will be held liable for any misrepresentation in the Prospectus whether made fraudulently or otherwise and that this liability could be determined during the proceedings for winding up. It was next contended on the authority of the decision in Amritsar National Banking Co., Ltd. v. Mohan Lal. 37 Ind Gas 791: (AIR 1917 Lah 391) that the relief of rectification of register is a matter which can satisfactorily be determined in the winding up and that the settling of the list of contributory is an important function of the liquidation Court and that the business of the winding up Court will come to a standstill if each contributory were allowed to institute a regular suit to determine his liability. As regards the case reported in (1876) 3 Ch D 749 it was urged, that the case does not lay down the correct law.

9. Referring to the contention regarding the Company being a necessary party to the action it was contended that the action is not against the first directors of the Company who can in a way be called agents of the Company but against the promoters and the Company could not be said to be the principal of the promoters. The Company in such a case is not a necessary party to an action against the promoters.

10. The learned counsel tried to refer to the merits of the plaintiffs' allegation in support of the fact that there is no substantial case to be tried and further that the plaintiffs had been guilty of unreasonable delay.

11. Mr. Chitale who appeared for a creditor Saxsaria Trust also opposed the application for grant of leave to continue the plaintiffs' action. According to him the present action, in respect of which leave is sought, really consists of two distinct actions rolled into one. One was an action against the promoters for alleged acts of misrepresentation and the second was against the Company for rectification of the Register or the Company by striking off shares of the face value of Rs. 10,00,000. This was intentionally done with a view to bring the case within the rule justifying grant of leave. The action according to the learned counsel, was commenced after proceedings for winding up had started and in such circumstances no leave ought to be granted.

12. Reference was made to Halsbury's Laws of England Volume 6 page 699 Note 1392 and the decision in In re. Pacaya Rubber and Produce Co. Ltd., 1913-1 Ch 218, in support of the contention that it is competent to order the transfer of the case by this Court to itself for trial and to the decision in Orient Bank of India v. Habibullah Khan, AIR 1924 Lah 049, for the contention that it is not open for a contributory to escape from his liability on the ground of fraud once an application has been made for compulsory winding up of the Company.

13. Mr. Chaphekar in reply contended that it was perfectly competent for the plaintiffs to commence their action before the order for winding up had been made and for that reason it cannot be said that the date of winding up should be taken by taking recourse to a deeming provision so as to deprive the plaintiffs of their right of action which they were entitled to avail of before the order for compulsory winding up was actually passed. Explaining the delay in filing the suit the learned counsel referred to the circumstances as mentioned in the plaint copy whereof was filed and relied upon the decision reported in In re Reese River Silver Mining Co., (1867) 2 Ch A 604 on the question of alleged laches.

14. On these submissions two questions to my mind appear prominent in arriving at my conclusion regarding propriety of granting leave. One is, whether the plaintiffs had commenced their action prior to winding up and the second is, whether the Company is a necessary party particularly where the relief of rescission and rectification of Register of the Company is involved?

15. In order to consider these questions it will be necessary to set down principles which are generally held applicable on the question of grant of leave and to examine cases which have applied these principles.

16. Buckley in his work of Companies Act, 13th Edition at page 499 while dealing with this question observes:

'Leave will be given to proceed with an action against third parties, to which the company is a necessary party, the plaintiff undertaking not to enforce against the company any judgment he may obtain, without the leave of the Court: e.g. where the bill was filed against a company and a third party for an account of promotion money alleged to have been received by him from the company; so where the bill was filed by a shareholder in a company to restrain the company from amalgamating itself with another company, which had, since the resolution for amalgamation, been ordered to wind up, and both companies were made defendants; and again, where, in ignorance of winding up resolutions having been passed, a shareholder commenced an action against the company and the direction for rescission of his contract to take shares, on the ground of misrepresentation, and for payment and indemnity.

But, in general leave to institute or proceed with an action will only be given where some question arises which cannot properly be determined in the winding up, and for whose determination aa action is requisite. Thus, where the bill was for an order to strike the plaintiff off the register on the ground of misrepresentation, leave was refused'.

17. In Halsbury's Laws of England 3rd Edition Volume 6 page 698 it is said in Section 1380 as follows:

'Proceedings will be allowed to continue where they are to enforce a mortgage or security upon the company's property, unless the liquidator offers to give all that the mortgagee can obtain by his proceedings, or an order in the winding up has already given him that relief. Proceedings will also be allowed to continue where the company is a necessary party to an action against it and other persons or where an. action is the most convenient method of trying a question or where a shareholder has commenced proceedings for .....rescission and rectification of the register before the winding up or where the claim is for specific performance'.

18. We shall next see how these principles have been applied in decided cases.

19. First case to which I would like to refer is one reported in (1867) 2 Ch A 604 known as Smith's case.

20. Facts of that case were that one Smith on the day of registration of the Company received pro.speclus issued by the Company which stated that they had agreed to purchase property N containing valuable claims some of which were in full operation. On the faith of the prospectus Smith took shares and was registered as shareholder on 2-8-1865. Up to 30-12-1865 he heard nothing to doubt the prospectus.

On that day he received a report from the Company showing that the Company had found the property worthless and that the working on it had been abandoned before the prospectus was issued. On 6-2-1866 Smith filed the bill to be relived on his shares. On 27-4-1866 a petition for winding up was mnde. This was followed by winding up order on 28-5-1866. Smith applied to go on with his suit. This was refused.

21. He then applied to have his name removed from the list of contributories. Master of the Rolls held that though he was not guilty of delay the misrepresentations were not such as would entitle him to the relief. Lord Cairns observed at page 617:

'I therefore think that the fact that tbe interest of creditors is involved in the winding up does not alter the matter under the circumstances of the case like the present, and that tbe question must be disposed of as if it were to be disposed of upon the bill at the time when tbe bill was filed and before any winding up in which case the. plaintiff would be entitled to the relief prayed by the bill.'

22. The next case to be referred is one reported in (1867) 5 Eq 249. The facts of the case are somewhat similar to the present case. In February 1865 a Company was incorporated with a capital of 25,000/- divided into 2500 shares. On the faith of the prospectus containing a statement that 'the directors and their friends have subscribed a large portion of the capital' the plaintiff applied for 50 shares which were allotted to him on 15-3-1865. He paid 25 as deposit and 75 as allotment money. On 25-7-1865 he filed the bill charging the directors of deceit and prayed for an injunction restraining the Company and the directors from prosecuting any further action against the plaintiff or any action for calls. He prayed for a decree for 100 paid by him. In August 1865 motion for injunction was made and it was agreed that judgment in the action be given On 24-2-1866 an order was made for winding up on a shareholder's petition. The Company had commenced business on 6-7-1865. Upon these facts it was held at page 263 as follows:

'I think the plaintiff, having filed his bill and applied for an injunction before the winding up, is entitled to a decree, I am now making, to save him from all consequences from the time of filing the bill that would result from any suit or action on the part of the Company against him in respect of the calls.'

23. In this case no question regarding leave was raised but from this decision it follows that where a plaintiff has commenced his action prior to winding up he is entitled to obtain relief against Company though there had been subsequent order for its being wound up. The ratio is that in such a case leave may be given although it may involve rescission and rectification of register.

24. Next important case which directly involves question of leave is the one reported in (1876) 3 Ch D 749. The facts of that case are as follows:

On 25-2-1876 resolutions were passed for voluntary winding up of the Company and on the 15th March they were confirmed. On 3rd May 1876 the plaintiff in ignoranee of the resolutions commenced his action against the Company and the directors to have his name struck off the register, for rescission of his conrract of September 1874 to take shares and in pursuance of which he was allotted shares in December 1874 on the ground of misrepresentations in the prospectus and to obtain payment of all money already paid and an indemnity against his future liability in respect of his shares. Liquidators moved the court for staying the action. V. C. Bacon observed at page 751: 'I do not think I ought to interfere with this action, in which the plaintiff does not ask more than he is entitled to require on the authority of Hentler-son v. Lacon. No relief is asked against the company beyond what the law allows, or which is inconsistent with the Winding-up Acts, The action is not against the company alone, but against the company and ether persons; and this prevents me from dealing with it as I otherwise might. If the objection to the action had been raised in Chambers, I could not have dealt with the matter until the cause came on to be heard, as the question of the plaintiff's right to repayment is inseparably connected with his case and the relief to which he claims to be entitled; and, as far as he knows, he can never obtain any substantial relief against the company in Chambers under the voluntary winding up'.

The motion was held misconceived and refused.

25. Next case which I would like to make a reference is the decision of Shadilal J., in the case reported in 37 Ind Cas 791: (AIR 1917 Lah 391). Facts of that case were that one Mohanlal and others sued the Amritsar National Banking Company Ltd., on 13-1-1916 after an order had been passed directing the winding-up of the company subject to supervision of the Court. After he had gone on for some time with the suit he applied for permission to continue the suit. This was granted by the Judge dealing with the liquidation proceedings. On appeal the High Court set aside that order. It was observed by Shadilal J., who delivered the judgment in that case:

'It appears that the object of the suit is to obtain a declaration that the respondents did not in the eye of law become share-holders of the company. This is, however, a matter which can be satisfactorily determined in the winding-up, and no action is necessary for the purpose. Indeed, the settlement of the list of contributories is an important function of the Liquidation Court, and the business of winding-up would come to a standstill, if each contributory were allowed to institute a regular suit for the determination of his liability'.

26. On consideration of the decisions referred to above it appears to me that where a share-holder bona fide commences his action against the Company and its directors or promoters tor rescission of his contract to take shares and for rectification of the Register of the Company before the winding-up then ordinarily leave ought to be granted. But where th action is commenced long after the cause of action had arisen and also subsequent to the commencement of the proceedings of winding-up and in anticipation of the winding-up order the leave ordinarily ought not to. be granted. This is particularly so where it is fully realised that the question of settlement of list of contributories is bound to come up for consideration before the winding up Court.

27. It cannot be gainsaid that if after the procecdings of winding-up have begun the persons, who are likely to be required to contribute the remaining part of their limited liability, are allowed to commence actions in the ordinary Courts ior rectification of register the entire work of winding-up would come to a stand-still after the winding up order is made. It is in fact for avoiding such result that power is vested in the Liquidation Court either to grant or refuse leave for continuing or commencing action. It the action is commenced by a suitor not forestalling the winding-up orders it is but just that his right as it exists at the date of commencement of his action be allowed to be determined by the forum of his choice.

But if he commences action after the proceedings of winding up have begun and in anticipation of an order of the Court for the compulsory winding up of the Company it may not be just to allow him to delay winding up particularly in view of the fact that winding up court has sufficient jurisdiction to consider the question whether he is entitled to have his name struck off the register and to be declared not to be a contributory.

28. In a case of this description it cannot be said that the questions involved are such that they cannot he satisfactorily determined at the winding up.,

29. The facts in (1867) 2 Ch A 604 show that the leave in that case for separate action was refused even, though the action was commenced about two months prior to the commencement of vinding up proceedings.

30. In Henderson v. Lacon's case, 1867-5 Eq 249 not only that action had been commenced bona fide the winding up but on a motion for injunction it was specifically agreed between the parties that the judgment in the action might be given. The question of leave was not specifically raised in that case. Moreover it is not clear from the facts of that case that the proceedings of winding up had commenced before the commencement of the action or later.

31. In the case of (1876) 3 Ch D 749 the winding up was voluntary. The action was commenced bv a shareholder bona-fide in ignorance of the resolutions for voluntary winding-up.

32. There was motion by the liquidator for staying the action on the ground that the Company had no assets and permitting the action to go on against the Company would involve it in unneces sary costs.

33. In the case reported in AIR 1917 Lah 391 the action was no doubt commenced after the winding up order was made.

34. Thus there is no identical case directly bearing on the question involved in this case and for that reason the matter had to be considered on general principles keeping in view the fact that the question regarding grant of leave is to be governed by the discretionary power of the Court which of course has to be exercised in view of the accepted judicial principles as applied to the circumstances of the case in question.

35. Mr. Chaphekar's another contention that the leave ought to be granted in this case as the Company is a necessary party to the action against third parties does not appeal to me. In the first place where the action is for rescission and rectification of Register* of the Company persons responsible for inducing the plaintiff to apply for shares are bound to be parties to the action but on that ground alone even after the winding-up order the leave is not granted. The cases relied upon by him make this perfectly clear.

36. I am also not convinced that the question in relation to the Company in his unit is that the same cannot be satisfactorily determined in the winding-up proceedings. In fact, as discussed earlier, that is pre-eminently a question which the winding-up court is called upon to determine under Section 184 of the Act, as soon as may be after making of the winding-up order.

37. In the present case the petitioner became a shareholder as far back as in September 1944. On 23-1-1.930 a creditor of the Company applied for its compulsory winding-up. On 31-8-1950 the petitioner commenced his action after coming to know of the petition. On 2-4-1951 winding up order was passed. The petitioner was an allottee of shares to the value of Rs. 10,00,000/-. The action was evidently commenced long after he was allotted shares and as far as I can see in anticipation of the order of winding up.

38. In view of these circumstances I feel that I ought to refuse leave to continue the suit as against the Company. He may, if he is so advised, continue the suit against the other defendants.